Invoice Discounting Vs Factoring For Small Business


Does your business need to get its hands on more working capital? Have you looked at invoice discounting or factoring? In this post we look at invoice discounting vs factoring for small businesses:

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For those not familiar with Invoice Discounting, it is simply a short term loan provided by financial agencies to the business owners, utilising the unpaid sales invoices as collateral.

Factoring on the other hand is the selling of the invoices to a third party at a discount. While both the terms may sound the same to many, there are often noticeable differences between the two.

Invoice Discounting Vs Factoring

Factoring arrangements are a complete sale of ownership of the debt owed to your company to a 3rd The invoices are sold at a discount with an agreement that the payment for the invoices will directly be collected by the 3rd party which is also known as the ‘Factor’.

This not only provides immediate cash flow into your business but also relieves you of the burden of collecting debts for the unpaid invoices. Chasing unpaid invoices is often a time consuming process which can affect your business further. Factoring thus takes care of your short term finance requirements and your debt collections.

Invoice Discounting on the other hand, is a loan borrowed against the invoices which are held with the financing organisation. As compared to Factoring, the business owners retain the right to collect the payment for the pending invoice. The finance company also charges a monthly fee and interest on the loan. While this doesn’t provide the same benefits as Factoring, it is more helpful in maintaining client relations.

The Invoice Discounting is often done on a confidential level between the business and the financing company and the client will never get to know about the funding.

Recommended reading: What is Invoice Finance?

What Should You Consider For Your Business?

If you own a small business it is often confusing to choose between Invoice Discounting and Factoring as both of them have pros and cons. 

Factoring indeed seems to be a better choice for small businesses as you have a flexibility of putting only a portion of your total invoices for sale while still maintaining your valuable and more trusted clients. Remember that most small businesses thrive on the healthy client relationships and selling up the more profitable clients can stain your business’ reputation in the long run.

Despite Invoice Discounting and Factoring being popular means to raise short-term finance they do provide some disadvantages to small businesses. So other finance options you might consider in order to raise working capital for your business include short-term bank loans, equity financing, peer-to-peer lending, government loans and grants.

Recommended reading: Six Other Ways to Finance Your Small Business

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